SoftBank founder Masayoshi Son has found himself in a not entirely unpredictable standoff with Intelsat SA's distressed debt holders. They'd like to him to pay more for his big bang entry into the satellite business.
Intelsat haircut: $3.6 billion
SoftBank, essentially a telecoms company with $21.4 billion of cash and strong cash flows from Japan, can surely afford to sweeten its February proposal for Intelsat, so accommodation may yet be reached. Still, negotiating with a bunch of junk bond investors will certainly test Son's debt market chops, a skill he'll need in spades to realize his ambitions for his giant new investment fund.
Known as the SoftBank Vision Fund, it will have $100 billion to deploy on technology companies that fit Son's dreams of an AI and robot-laden world. That's a massive amount of money; far too much for venture investments in start-ups. So the outfit will be more like a really big private equity or growth fund. It will no doubt rely heavily on leverage to boost its acquisition firepower, so Son won't want to be a pushover in negotiations with Intelsat creditors.
Of course, Son's no rube. SoftBank has done big deals before, including the $20 billion takeover of Sprint Corp, and the recent takeover of ARM Holdings that pushed net debt to more than $100 billion. But the new fund will be in the biggest of the big leagues so power dynamics with sellers and reputation with lenders count.
The chief reason Son created the Vision Fund was to deploy billions quickly in a way SoftBank on its own would never be able to do given its current debt load — with the backing of Saudi Arabia and Apple Inc. among others.
So the Intelsat wrangling is about more than Son getting hold of the U.S satellite operator, which is straining under $15 billion in debt after two leveraged buyouts. It's also a delicate dance between the debt market and Son. Some of these same investors will no doubt like a slice of the Vision Fund action, so this will be an important opening step.
His Intelsat offer is in two parts: first SoftBank contributes its stake in OneWeb, a satellite start-up, to Intelsat, then it injects $1.7 billion into the combined entity. That'll be used to restructure Intelsat's debt, with SoftBank ending up with 39.9 percent of the new company. Intelsat's trailing gross leverage would fall to 6.6 times Ebitda from 8.8 times.
SoftBank's offer set a relatively high threshold of 85 percent of the Intelsat bondholders needing to back the deal. The holdouts already seem to have enough support to scupper a deal, according to a scoop from Bloomberg News. The exchange offer includes different terms on the seven tranches of debt. On average, bondholders are getting 74 cents on the dollar, and the aggregate haircut is a hefty $3.6 billion.
All seven bonds are trading higher than the exchange offer price, reflecting the bet that the terms will be sweetened, according to Bloomberg Intelligence analyst Stephen Flynn. For example, the Intelsat Luxembourg 2021 and 2023 bonds are trading around 61 cents on the dollar, compared with 46 cents in the offer price.
Bondholders shouldn't be too greedy, though. Intelsat's prospects without SoftBank are uncertain. The satellite industry is in a period of tumultuous change brought on by upstart competitors and a capacity glut, and it has significant debt maturities in less than two years.
Son could turn his attention elsewhere if creditors don't play ball, although that seems unlikely. Given what's at stake, Son will probably find a middle ground on which to launch his space adventure.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.